For Natural Gas ETF, Hope Springs Eternal

By Brendan Conway

Natural gas prices are on track for a gain after a volatile year. The same can’t be said for a popular natural-gas exchange-traded fund.

The United States Natural Gas Fund (UNG) is down about 25% year-to-date, after falling 46 percent in 2011. And 41 percent in 2010. And 56 percent the year before that. Natural-gas futures, meanwhile, are ahead by about 13% year-to-date.

REUTERS

It’s the classic problem in ETFs based on commodity futures: You can’t simply buy and hold futures the way you own a stock. To keep a constant exposure, commodity ETFs trade in and out of futures contracts, since those futures expire eventually. Depending on the steepness of the “curve” — if futures contracts are in what’s known as “contango” — all that trading can be costly. It’s a key reason why UNG and other commodity funds are more a tool for traders than buy-and-hold investors.

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